Whether to negotiate for more stock options or more money when taking a new job

If you're in the enviable position of negotiating your
compensation for a new job, you might find yourself weighing two
types of pay: salary (including any bonus) and stock options.

"It's a phenomenal way to align the incentives of growing the
business for the long term with the incentives of the employee,"
says Atish Davda, CEO of EquityZen, a
marketplace for investors looking to buy shares from startup
employees. "They're saying 'Help me make this pie as
big as possible, and to incentivize you to do that, I'm going to
give you a piece of the pie.'"

If the company does well, you may be able to sell your shares at
a profit. If the company doesn't do well, your options might not
be worth much, or anything at all. (In this case, we're
specifically discussing the most common form of employee equity,
called Employee Stock Options, or ESOs.)

So, when it comes down to negotiating your compensation
package, should you aim for more options or more cash?

The answer, as with most financial questions, is: It depends.

"It depends where you are in life," says Davda. "If you've got a
spouse and dog and two kids, maybe it's a safer bet to ask for a
greater salary. If you're young and don't have that many
obligations, and you really are excited about the potential of
this company, it might be worth asking for greater number of
options."

"If you're offered options from an established company that's
been around for a while, and the stock is traded publicly, and
you know its value and the vesting period, depending on your
position, that might be a scenario where you say 'I'm going to
take a chance of getting less salary and more options, and there
could be more profit in the future," says Herb White,
founder and president of Life Certain Wealth
Strategies in Colorado.

If you're in the position
to negotiate, you have to look to the company's
future.Flickr / WOCinTech
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Unlike your paycheck or bonus (hopefully), it isn't guaranteed if
you'll ever see an injection of cash from your options, and if
you do, you can't be sure when or how much. Therefore, accepting
options is a risk: While they may be wildly lucrative, they also
might end up holding negligible value.

Startup companies have historically been more generous in
offering options, White says. "They're trying to conserve their
cash to grow the company. From the employee standpoint, it
depends on your belief in that company being successful. A lot of
people who started with companies like Microsoft in the very
beginning became very wealthy, but for every company that's
highly successful like that, there's probably 10 that aren't.
That's an individual question — I might be more of a risk taker
than the next person. I might sacrifice salary now for options
because I believe the company has great future."

Adam Nash, CEO of online investing platform Wealthfront, points out that —
although "there are many very real reasons you might need the
cash" — if you aren't interested in equity, you might want to
rethink joining the company. "Most hyper-growth startups have a
bias to people who prefer more equity," he explains. "When you
say you want that, implicitly what you're saying is you think the
company will be really valuable. You would give up money today
for a share of the company's success tomorrow. The truth is if
you don't believe in the company, you have to question why you're
joining in the first place, given there are so many other
companies to work for."

Nash often recommends a person considering taking options first
understand their cash needs, and be upfront about them. "When you
get stock options, they're really not going to be material unless
the company does extremely well," he cautions. "When you take
equity in a private company, that's not part of your budget. You
can't pay your student loans with it. It's best to think if it
works out, it could be worth this much, but not count on that
money day to day basis. "

"In either case," Davda says, "it's important before you accept
an offer, and every year or couple years, to ask yourself,
'What's important to me this year, or two years from now? Is it
stability in cash? Or is it the potential for a big payout in
next five, six, or seven years?"

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